V.15. 2. How Does A Court Determine Whether Contract Language Is Ambiguous?

• Jurisdiction: New York

2. How Does a Court Determine Whether Contract Language Is Ambiguous?

In deciding whether contract language is ambiguous, the court should consider the attendant circumstances and the rules of contract construction³⁵⁴ to determine whether the language at issue is reasonably susceptible to two meanings. The court must consider the agreement as a whole and not focus on particular language without taking into account the entire agreement that contains the language. Particular words and phrases should be given a meaning that is appropriate given the agreement as a whole and the parties’ purpose in contracting.

The court must consider whether the ambiguity can be resolved by looking at all the terms of the agreement. Ambiguity exists only if the contract language at issue is reasonably susceptible to two meanings. Examination of the entire agreement may eliminate the ambiguity by showing that although the language at issue is linguistically susceptible to two constructions, only one construction is reasonable in the context of the agreement as a whole. A court, after reading the entire agreement, can rule there is no ambiguity because even though particular contract language might be susceptible to two meanings, one of those meanings is not reasonable. If the document as a whole clearly reveals the parties’ intent, a court examining the agreement should choose the construction that will carry out that intent and may summarily rule to that effect.

Although courts often say the issue of ambiguity should be determined by looking only within the four corners of the contract, the court also considers the context in which the parties entered into their contract. The initial inquiry of whether language is ambiguous should be viewed as having two parts. A court looks at only the words within the four corners of the agreement but it does the looking from the perspective of a reasonably intelligent person who understands the context and purpose of the agreement and the customs, practices and usages in the parties’ business. If possible, a contract will be construed to give effect to its purpose.³⁵⁵ A court construing a contract must give the language a fair and reasonable reading consistent with the purpose of the agreement. ³⁵⁶

Contract language should be given a meaning that is sensible in light of the attendant circumstances. Courts have considered

• the purpose and objective of the parties in contracting;

• the circumstances surrounding the parties’...